Posted by: mel | April 25, 2009

China deals: RI takes note

Magda Safrina, Massachusetts | Fri, 04/24/2009 12:54 PM | Opinion

The fact that China is holding about US$2 trillion in reserves irks not only the US, but also the rest of the world. The scarcity of US dollars in the world market has dragged countries with fragile currencies, including Indonesia, to severe levels of currency depreciation. But the huge foreign reserve has also become a big problem for China itself.

China has been the largest US debt holder, accounting for 23 percent of a total $10.024 trillion US government debt. With the growing global recession, fear on the Chinese side is also growing, driven mainly from the potential high inflation and default risk in the US.

With the worsening of global economic conditions, it seems difficult for China to turn its growth contribution to domestic consumption around, mostly because of the reluctance of its domestic market to increase consumption.

The nightmare of massive lay-offs is now growing in the Chinese workforce. Still, it is very difficult to predict what decisions will be made by the Chinese government regarding the US trade and debt dilemma.

One thing, however, is clear; China has been very aggressive in attempting to stimulate growth in Asia through some of its policies, such as the credit swap it has offered several Asian countries including Indonesia.

The Chiang Mai initiative, in which China committed to contribute an emergency fund for countries in trouble, can also be viewed as one of the new Chinese trade policies aimed at expanding its market to diversify risk of a decline in US imports.

Another campaign that has been voiced out loud by China is its proposal to introduce a unified international currency reserve that was brought forward as part of the Asian agenda at the recent G-20 meeting in London.

This seems to be one of China’s major policies aimed at reducing its dependency on the US economy, as well as its vulnerability to a depreciating US dollar.

Increasing ties between Indonesia and China in the context of the credit swap and Indonesia’s apparent support for the international currency reserve reflect Indonesia’s generally positive response to China’s economic policies. Before Indonesia moves forward and goes too far in supporting Chinese policies, however, it is important for us to re-assess all the pros and the cons of the chosen policies and, in particular, to forecast the long-term implications.

One of these policies mentioned above, and worth delving into more deeply, is the issue of the credit swap which is a good way to minimize risk in currency volatility, but can also be viewed as a growing flexibility on the Indonesian part, by increasing imports from China.

It is important for Indonesia to review the products we import from China piece by piece, especially those that we also produce domestically – even if we don’t have a comparative advantage.

Is it not the case that a credit swap not only prevents Indonesia from currency risk, but also encourages Indonesia to import more from China at the expense of local manufacturers? While this may sound like an argument for protectionism, one must keep in mind that the growing trade gap between Indonesia and China will grow at a higher rate if Indonesia does not implement this policy carefully.

Aside from the credit swap, Indonesia’s support for an international currency reserve could also be viewed from many different perspectives. On the one hand, it would be good to reduce our dependency on the US dollar but it could push Indonesia to import more and export less.

The government needs to focus on the pros and cons of all our trade policies, and work out how we can benefit from these policies in the long run.

It also must make sure we do not establish policies that will only benefit China in preventing its lions share of the export market pie (to the US and Europe) from shifting to other Asian countries including Indonesia, especially since Indonesia and China tend to produce similar goods.

The writer is graduate student at the International Business School, Brandeis University, US, and is a founder of the Aceh Initiative

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